Nov 11, 2010 04:23 PM

Paradigm Lost


Major economies are facing structural economic difficulties impossible to resolve under the existing political economy. Central banks, especially the Fed, assume that they can and should solve them through monetary policy. This creates a buzz in the financial markets, and is misinterpreted as a sign of economic improvement – but the effect peters out after a short period of time. When the financial markets weaken, the central banks apply it all over again. But the effects fade faster with each use. The process ends when developed economies, especially the U.S., are infected with inflation from emerging economies. We are likely to see signs of this story ending in 2012.
The Fed just announced its QE 2 of US$ 600 billion. The policy justification is that the money will be lent to households for consumption or businesses for investment. The extra kick to the economy is intended to inspire businesses and households to flourish optimism on the future.

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